PJSC Cherkizovo Group. Consolidated Financial Statements for the year ended 31 December 2016 and Independent Auditor s Report

Transcription

1 Consolidated Financial Statements for the year ended 2016 and Independent Auditor s Report

2 Contents Page STATEMENT OF MANAGEMENT RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS 1 INDEPENDENT AUDITOR S REPORT 2 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016: CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 7 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 8 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 10 CONSOLIDATED STATEMENT OF CASH FLOWS 11 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of the business Significant accounting policies New and revised International financial reporting standards Key sources of estimation uncertainty Operating segments Cost of sales Selling, general and administrative expenses Interest expense, net Other expenses, net Income tax Property, plant and equipment, net Investment property Goodwill Intangible assets Biological assets Investments in joint venture Long-term deposits in banks Inventories Taxes recoverable and prepaid Trade receivables, net Other receivables, net Cash and cash equivalents Other current assets Shareholder s equity Non-controlling interests Borrowings Tax related liabilities Financial instruments Related parties Commitments and contingencies 50

3 PJSC CHERKIZOVO GROUP STATEMENT OF MANAGEMENT RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 Management is responsible for the preparation of the consolidated financial statements that present fairly the financial position of (the Company ) and its subsidiaries (the Group ) as at 2016, and the consolidated results of its operations, cash flows and changes in equity for the year then ended, in compliance with International Financial Reporting Standards ( IFRS ). In preparing the consolidated financial statements, management is responsible for: Properly selecting and applying accounting policies; Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; Providing additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group s consolidated financial position and financial performance; Making an assessment of the Group s ability to continue as a going concern. Management is also responsible for: Designing, implementing and maintaining an effective system of internal controls throughout the Group; Maintaining adequate accounting records that are sufficient to show and explain the Group s transactions and disclose with reasonable accuracy at any time the consolidated financial position of the Group, and which enable them to ensure that the consolidated financial statements of the Group comply with IFRS; Maintaining statutory accounting records in compliance with local legislation and accounting standards; Taking such steps as are reasonably available to them to safeguard the assets of the Group; and Preventing and detecting fraud and other irregularities. The consolidated financial statements of the Group for the year ended 2016 were approved by Management on 1 March On behalf of the Management: Sergei Mikhailov Chief Executive Officer Ludmila Mikhailova Chief Financial Officer 1

4 ZAO Deloitte & Touche CIS 5 Lesnaya Street Moscow, , Russia Tel: +7 (495) Fax: +7 (495) deloitte.ru INDEPENDENT AUDITOR S REPORT To the Board of Directors and Shareholders of Opinion We have audited the consolidated financial statements of (the Company ) and its subsidiaries (collectively the Group ), which comprise the consolidated statement of financial position as at 2016, and the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 2016, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards ( IFRSs ). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing ( ISAs ). Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (the IESBA Code ) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in the Russian Federation, and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a more detailed description of DTTL and its member firms. ZAO Deloitte & Touche CIS. All rights reserved.

5 Why the matter was determined a key audit matter Recoverability of government subsidies At 2016 the amount of subsidies receivable for interest expense reimbursement was RUB 1,104,972 thousand (2015: RUB thousand). In the fourth quarter of 2016 the Group changed the estimate regarding the timing of subsidy recognition which resulted in the write-off of the full balance of subsidies receivable accrued on qualifying loans that were not confirmed for subsidizing by the regional bodies of the Ministry of agriculture of the Russian Federation (RUB thousand). Further details are provided in Notes 4 and 21 to the consolidated financial statements. We focused on this area as a key audit matter because the management of the Group had to apply significant judgement in assessing the recoverability of the subsidies receivable balance. How the matter was addressed in the audit For subsidies receivable we performed the following audit procedures to assess recoverability of the balance: we verified the appropriateness of the change in the accounting estimate by reference to the negative changes in the macroeconomic environment, deviation from the historical pattern of significant portion of subsidies being collected in the fourth quarter of the year and a new policy on subsidy assignment to agricultural producers announced by the government in the fourth quarter of 2016 and effective from 1 January 2017; on a sample basis we verified that compliance criteria for recognition of subsidies were met; on a sample basis we verified that the Group received proofs of subsidizing from the regional bodies of the Ministry of agriculture of the Russian Federation; we analytically recalculated the subsidies accrual for 2016 and checked the accuracy of the subsidy rates and calculation of the subsidized shares of the borrowed funds; and we analysed the subsidies receivable balance by regions of the Russian Federation to identify abnormal concentration, which may indicate potential recoverability issues for subsidies from that particular region. Valuation of biological assets At 2016 the carrying values of current and non-current biological assets were RUB thousand and RUB thousand respectively (2015: RUB thousand and RUB thousand). Biological assets are stated at fair value less estimated costs to sell. The Group recognized a fair value adjustment of RUB thousand at 2016 (2015: RUB thousand). Further details are provided in Notes 4 and 15 to the consolidated financial statements. We focused on this area as a key audit matter We performed audit procedures on all valuation models relating to material types of biological assets. Our audit procedures included verification of management s assumptions used in the models. The assumptions to which the models were most sensitive and most likely to lead to material mistakes in valuation were: future selling prices and projected cost per head/ kg. 3

6 Why the matter was determined a key audit matter because the assessment of the fair value using valuation techniques involves complex and significant judgements about future poultry and pork prices and other assumptions, involving additional uncertainty due to the current volatility of poultry and pork prices in the market. How the matter was addressed in the audit We challenged management s assumptions in the models with reference to historical data and, where applicable, external benchmarks, noting that the assumptions used fell within an acceptable independently determined range. We compared the current performance up to the date of the audit report with the forecasts to ensure no significant changes had occurred after the testing had been performed. We tested the accuracy of the models with the assistance of our own specialists and carried out audit procedures on management s sensitivity calculations. We tested the appropriateness of the related disclosures provided in the consolidated financial statements. In particular, we focused on the disclosure of key unobservable inputs and the related sensitivity analysis. Related party transactions As described in Note 29 Related Parties to the consolidated financial statements, the Group enters into various significant transactions with related parties. The transactions include sales and purchases of inventories, provision of services, and sales and purchases of property, plant and equipment. The transactions with related parties exceeding certain criteria are approved by the Board of Directors. We consider the transactions with related parties to be a key audit matter because the Audit Committee regularly discusses transactions with related parties and the terms on which these transactions have been conducted, in addition to the regulatory, investors and management s interest in this area, especially in determining appropriate pricing for such transactions. Our audit procedures included obtaining an understanding of key controls around the process of approval and authorization of related party transactions. Our substantive audit procedures included testing, on a sample basis, the transactions with related parties by reviewing supporting documentation. We also challenged management s conclusion that the transactions were done on an arm s length basis by means of reviewing a sample of agreements and comparing the related party transactions prices to those quoted by comparable companies and market data, where available. We also checked the completeness and accuracy of the related parties disclosure by reference to the audited data. 4

7 Other Information Management is responsible for the other information. The other information comprises the information included in the Annual report, but does not include the consolidated financial statements and our auditor s report thereon. The Annual report is expected to be made available to us after the date of this auditor's report. Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. When we read the Annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards ( IFRSs ), and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group s financial reporting process. Auditor s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group s internal control; 5

8 evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management; conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Group to cease to continue as a going concern; and evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated to those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period, which constitute the key audit matters included herein. 1 March 2017 Moscow, Russian Federation Rinat Khasanov, Director (license no ) ZAO Deloitte & Touche CIS The Entity: Primary State Registration Number: Certificate of registration in the Unified State Register of , issued by Moscow Interdistrict Inspectorate of the Russian Ministry of Taxation 46. Address: 5B, Lesnaya street, Moscow, Russian Federation, Audit Firm: ZAO Deloitte & Touche CIS Certificate of state registration , issued by the Moscow Registration Chamber on Primary State Registration Number: Certificate of registration in the Unified State Register of , issued by Moscow Interdistrict Inspectorate of the Russian Ministry of Taxation 39. Member of Self-regulated organization of auditors Russian Union of auditors (Association), ORNZ

9 Consolidated statement of profit or loss and other comprehensive income For the year ended 2016 Notes Revenue Net change in fair value of biological assets and agricultural produce 15 ( ) ( ) Cost of sales 6 ( ) ( ) Gross profit Selling, general and administrative expenses 7 ( ) ( ) Other operating income, net Share of loss of a joint venture 16 ( ) - Operating profit Interest income Interest expense, net 8 ( ) ( ) Other income (expenses), net ( ) Profit before income tax Income tax (expense) benefit 10 (72 861) Profit for the year and total comprehensive income Profit and total comprehensive income attributable to: Cherkizovo Group Non-controlling interests (31 709) Earnings per share Weighted average number of shares outstanding basic and diluted: Net income attributable to Cherkizovo Group per share basic and diluted (in Russian rubles): The accompanying notes form an integral part of these consolidated financial statements. 7

10 Consolidated statement of financial position As at 2016 ASSETS Notes Non-current assets Property, plant and equipment Investment property Goodwill Intangible assets Non-current biological assets Notes receivable, net Investments in joint venture Long-term deposits in banks Deferred tax assets Other non-current assets Total non-current assets Current assets Biological assets Inventories Taxes recoverable and prepaid Trade receivables, net Advances paid, net Other receivables, net Cash and cash equivalents Other current assets Total current assets TOTAL ASSETS The accompanying notes form an integral part of these consolidated financial statements. 8

11 Consolidated statement of financial position (continued) As at 2016 EQUITY AND LIABILITIES Notes Equity Share capital Treasury shares 24 (78 033) (78 033) Additional paid-in capital Retained earnings Total shareholder s equity Non-controlling interest Total equity Non-current liabilities Long-term borrowings Provisions Deferred tax liability Other liabilities Total non-current liabilities Current liabilities Short-term borrowings Trade payables Advances received Payables for non-current assets Tax related liabilities Payroll related liabilities Other payables and accruals Total current liabilities Total liabilities TOTAL EQUITY AND LIABILITIES The accompanying notes form an integral part of these consolidated financial statements. 9

12 Consolidated statement of changes in equity For the year ended 2016 Share capital Treasury shares Total Non- Amount Number of shares Amount Number of shares Additional paidin capital Retained earnings shareholder s equity controlling interests Total equity Balances at 1 January (78 033) ( ) Profit for the year and total comprehensive income Acquisition of non-controlling interests (2 884) - (2 884) (15 008) (17 892) Dividends ( ) ( ) - ( ) Balances at (78 033) ( ) Profit for the year and total comprehensive income (31 709) Additional non-controlling interests arising on set up of new subsidiaries Dividends ( ) ( ) - ( ) Balances at (78 033) ( ) The accompanying notes form an integral part of these consolidated financial statements. 10

13 Consolidated statement of cash flows For the year ended CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax Adjustments for: Depreciation and amortization Bad debt expense Foreign exchange (gain) loss, net ( ) Interest income ( ) ( ) Interest expense, net Net change in fair value of biological assets and agricultural produce Gain on disposal of property, plant and equipment, net (8 054) (49 793) Gain on disposal of non-current biological assets, net ( ) ( ) Write-off of receivables from insurance company Share of loss of a joint venture Other adjustments, net (28 059) ( ) Operating cash flows before working capital and other changes Decrease (increase) in inventories ( ) Increase in biological assets ( ) ( ) Increase in trade receivables ( ) ( ) Decrease (increase) in advances paid ( ) Decrease (increase) in other receivables and other current assets ( ) Increase in other non-current assets (70 105) (28 022) Increase in trade payables Increase in tax related liabilities (other than income tax) Increase (decrease) in other current payables ( ) Operating cash flows before interest and income tax Interest received Interest paid ( ) ( ) Government grants for compensation of interest expense received Income tax paid ( ) ( ) Net cash from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment ( ) ( ) Purchase of non-current biological assets ( ) ( ) Purchase of intangible assets ( ) ( ) Proceeds from sale of property, plant and equipment Proceeds from disposal of non-current biological assets Investments in joint venture ( ) ( ) Placing of deposits and issuance of short-term loans - ( ) Placing of notes receivable ( ) ( ) Repayment of short-term loans issued and redemption of deposits Net cash used in investing activities ( ) ( ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term loans Repayment of long-term loans ( ) ( ) Proceeds from short-term loans Repayment of short-term loans ( ) ( ) Dividends paid ( ) ( ) Disposal (acquisition) of non-controlling interests (17 892) Net cash (used in) generated from financing activities ( ) Net (decrease) increase in cash and cash equivalents ( ) Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year The accompanying notes form an integral part of these consolidated financial statements. 11

14 For the year ended Nature of the business General information (the Company ) is a public joint stock company incorporated in Russia. The registered office of the Company is 5, Lesnaya st., building B, Moscow, , Russia. The Company s parent is MB Capital Europe Ltd., which is registered in Cyprus and owned approximately 61% of the Company s shares at 2016 and The ultimate controlling party of is Babaev / Mikhailov family who jointly control MB Capital Europe Ltd. At 2016 and 2015 the Group included the following principal companies: Name of company Legal form Nature of business % % OJSC Cherkizovsky Meat Processing Plant Open Joint Stock Company Meat processing plant 95% 95% (JSC CMPP) LLC PKO Otechestvennyi Product Limited Liability Company Meat processing plant 95% 95% JSC Cherkizovo-Kashira Joint Stock Company Meat processing plant 95% 95% LLC TPC Cherkizovo Limited Liability Company Procurement company 95% 95% CJSC Petelinskaya Closed Joint Stock Company Raising poultry 88% 88% OJSC Vasiljevskaya Open Joint Stock Company Raising poultry 100% 100% OJSC Kurinoe Tsarstvo Open Joint Stock Company Raising poultry 100% 100% CJSC Kurinoe Tsarstvo Bryansk Closed Joint Stock Company Raising poultry 100% 100% CJSC Mosselprom Closed Joint Stock Company Raising poultry 100% 100% LLC Lisko Broiler Limited Liability Company Raising poultry 100% 100% LLC Petelino Trade House Limited Liability Company Trading company: 88% 88% distribution of poultry CJSC Botovo Closed Joint Stock Company Pig breeding 76% 76% LLC Cherkizovo-Pork* Limited Liability Company Pig breeding 100% 100% LLC Kuznetsovsky Kombinat Limited Liability Company Pig breeding 100% 100% LLC Cherkizovo-Grain Production Limited Liability Company Grain crops cultivation 100% 100% * In December 2015, 7 companies of pork segment: LLC Lipetskmyaso, LLC RAO Penzenskaya Grain Company (PZK), LLC Orelselprom, LLC Resurs, LLC Agroresurs-Voronezh, LLC TD Myasnoe Tsarstvo and LLC Tambovmyasoprom were merged into LLC Cherkizovo-Pork. Subsequently in November and December 2016 LLC Cherkizovo-Feed Production and LLC Voronezhmyasoprom were also merged into LLC Cherkizovo-Pork. The business of the Group The Group s operations are spread over the full production cycle from grain and feed production and breeding to meat processing and distribution. The operational facilities of the Group include six meat processing plants, fifteen pig production complexes, eight poultry production complexes, six combined fodder production plants and four grain farming complexes and a swine nucleus unit. The Group also operates three trading houses with subsidiaries in several major Russian cities. The Group s geographical reach covers Moscow, the Moscow region, the regions of Saint Petersburg, Kaliningrad, Penza, Lipetsk, Vologda, Ulyanovsk, Chelyabinsk, Tambov, Krasnodar, Ekaterinburg, Rostov-na-Donu, Briansk, Voronezh, Belgorod, Kursk, Orel and Kazan. The Group is represented in the European part of Russia through its own distribution network. The Group owns locally recognised brands, which include Cherkizovo ( Черкизово ), Pyat Zvezd ( Пять Звезд ), Petelinka ( Петелинка ), Kurinoe Tsarstvo ( Куриное Царство ) and Imperia Vkusa ( Империя вкуса ) and has a diverse customer base. At 2016 and 2015 the number of staff employed by the Group approximated and , respectively. 12

15 For the year ended Nature of the business continued Operating environment Emerging markets such as Russia are subject to different risks than more developed markets, including economic, political and social, and legal and legislative risks. Laws and regulations affecting businesses in Russia continue to change rapidly; tax and regulatory frameworks are subject to varying interpretations. The future economic direction of Russia is heavily influenced by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment. Because Russia produces and exports large volumes of oil and gas, its economy is particularly sensitive to the price of oil and gas on the world market. Starting from 2014, sanctions have been imposed in several packages by the U.S. and the E.U. on certain Russian officials, businessmen and companies. This led to reduced access of the Russian businesses to international capital markets. The above mentioned events have led to reduced access of the Russian businesses to international capital markets, increased inflation, slackening of the economic growth rates and other negative economic consequences. The impact of further economic developments on future operations and financial position of the Group is difficult to determine at this stage. 2. Significant accounting policies Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRSs ). Basis of preparation The entities of the Group maintain their accounting records in accordance with laws, accounting and reporting regulations of the jurisdictions in which they are incorporated and registered. Accounting policies and financial reporting procedures in these jurisdictions may differ substantially from those generally accepted under IFRS. Accordingly, the consolidated financial statements, which have been prepared from the Group s statutory basis accounting records, reflect adjustments necessary for such financial statements to be presented in accordance with IFRS. The consolidated financial statements have been prepared under the historical cost convention, except for biological assets measured at fair value less estimated point-of-sale costs; and assets and liabilities of subsidiaries acquired and recorded in accordance with IFRS 3 Business combinations ( IFRS 3 ). Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2 or value in use in IAS 36. In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. Functional and presentation currency The functional currency of the Company, and each of its subsidiaries, is the Russian rouble. These consolidated financial statements are also presented in Russian roubles which is the presentation currency used by the Group. 13

16 For the year ended Significant accounting policies continued Foreign currency transactions In preparing the financial statements of each individual group entity, transactions in currencies other than the entity s functional currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences on monetary items are recognised in profit or loss in the period in which they arise. Going concern These consolidated financial statements have been prepared on the assumption that the Group will continue as a going concern in the foreseeable future, which implies the realization of assets and settlement of liabilities in the normal course of business. The Group continues to monitor its existing liquidity needs on an on-going basis. Management believes that the Group will have sufficient operating cash flows and borrowing capacity to continue as a going concern in the foreseeable future. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved when the Company: Has power over the investee; Is exposed, or has rights, to variable returns from its involvement with the investee; and Has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Company has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company s voting rights in an investee are sufficient to give it power, including: The size of the Company s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; Potential voting rights held by the Company, other vote holders or other parties; Rights arising from other contractual arrangements; and Any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders meetings. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the noncontrolling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. 14

17 For the year ended Significant accounting policies continued Business combinations (from third parties) Acquisitions of businesses from third parties are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognized in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value at the acquisition date, except for: Deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognized and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits respectively; Liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 2 Share-based Payment at the acquisition date; and Assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that Standard. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer s previously held interest in the acquiree (if any) over the net of the acquisitiondate amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer s previously held interest in the acquiree (if any), the excess is recognized immediately in profit and loss as a bargain purchase gain. Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests proportionate share of the recognised amounts of the acquiree s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Other types of non-controlling interests are measured at fair value or, when applicable, on the basis specified in another IFRS. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognized as of that date. The measurement period is the period from the date of acquisition to the date the Group obtains complete information about facts and circumstances that existed as of the acquisition date and is subject to a maximum of one year. Acquisitions of entities under common control Acquisitions of entities under common control are accounted for on the basis of predecessor carrying values, which results in the historical book value of assets and liabilities of the acquired entity being combined with that of the Group. For common control transactions the consolidated historical financial statements of the Group are retrospectively restated to reflect the effect of the acquisition as if it occurred at the beginning of the earliest period presented. Consideration paid is reflected as a decrease in additional paid in capital. Goodwill Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business (see accounting policy on Business combinations (from third parties) above) less accumulated impairment losses, if any. For the purposes of impairment testing, goodwill is allocated to each of the Group s cash-generating units (or groups of cashgenerating units) that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. 15

18 For the year ended Significant accounting policies continued Investments in joint venture A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The Group reports its interests in joint venture using the equity method of accounting, whereby an investment in an associate or a joint venture is initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group s share of the profit or loss and other comprehensive income of the associate or joint venture. When the Group s share of losses of an associate or a joint venture exceeds the Group s interest in that associate or joint venture (which includes any long-term interests that, in substance, form part of the Group s net investment in the associate or joint venture), the Group discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. An investment in an associate or a joint venture is accounted for using the equity method from the date on which the investee becomes an associate or a joint venture. The requirements of IAS 39 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group s investment in an associate or a joint venture. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases. When a group entity transacts with a joint venture of the Group, profits and losses resulting from the transactions with the joint venture are recognised in the Group s consolidated financial statements only to the extent of interests in the joint venture that are not related to the Group. Property, plant and equipment Owned assets Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Land is not depreciated. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials, direct labour, and any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site in which they are located. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Gains and losses on disposal of an item of property, plant and equipment are recognized net in other income in profit or loss. Repairs and maintenance The cost of replacing part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of day-to-day servicing of property, plant and equipment are recognized in profit or loss as incurred. Depreciation Depreciation is recognized to write off the cost of assets (other than freehold land and properties under construction) less their residual values over their useful lives, using the straight-line method. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. The estimated useful lives for the current and comparative periods are as follows: Land Buildings, infrastructure and lease hold improvements Machinery and equipment Vehicles Other indefinite life years 3-22 years 3-10 years 3-10 years 16

19 For the year ended Significant accounting policies continued Depreciation methods, useful lives and residual values are reassessed at each reporting date, with the effect of any changes in accounting estimate recognized on a prospective basis. Investment property Investment properties represent buildings and land held to earn rentals and/or for capital appreciation (including property under construction for such purposes). Investment properties are measured at cost, including transaction costs, less accumulated depreciation and impairment losses. Land is not depreciated. Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives (10-40 years) of each building. An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the property is derecognised. Intangible assets Intangible assets represent acquired trademarks and computer software. All trademarks have been determined to have an indefinite life. Intangible assets with finite useful lives are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives are carried at cost less accumulated impairment losses. Impairment of tangible and intangible assets other than goodwill The carrying amounts of the Group s non-current assets are reviewed at each reporting date to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, then the asset s recoverable amount is estimated. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the cash-generating unit ). The goodwill acquired in a business combination acquisition, for the purposes of impairment testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination. An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised immediately in profit or loss. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. When an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss. Inventories Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the weighted average principle and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs included in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress cost includes an appropriate share of production overheads based on normal operating capacity. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. 17